Using Pre-Listing Information to Mitigate Initial Public Offerings’ Long Run Underperformance: Evidence from Sri Lanka

Abstract

The main channel of information dissemination for initial public offerings (IPO) in the pre-listing stage is the prospectus. Auditor fee and director emoluments are two types of information that investors know about in advance through the prospectus. Industry and media publicity are also in the focus of investors in the pre IPO stage. This study inquires whether such information can be used to form successful trading strategies in the long run. IPO stock portfolios have been constructed based on the above four types of information and their returns have been tested using four popular asset pricing models to answer the above question. The findings confirm that long only strategies are successful with regard to all four types of information while long and short strategies are proved to be a failure. The findings also reveal that portfolios consisting of non-finance stocks, stocks with high media coverage, high audit fees and high director fees tend to provide the highest returns compared to other IPO stock portfolios. Hence, this study provides useful insights to investors, regulators and other professionals in the Sri Lankan capital market.